On June 30, 2018, Hardy Industries had outstanding $40 million of 8%, convertibl
ID: 2539590 • Letter: O
Question
On June 30, 2018, Hardy Industries had outstanding $40 million of 8%, convertible bonds that mature on June 30, 2023. Interest is payable each year on June 30 and December 31. The bonds are convertible into 2 million shares of no par common stock. At June 30, 2018, the unamortized balance in the discount on bonds payable account was $8 million. On June 30, 2018, half the bonds were converted when Hardy's common stock had a market price of $50 per share. When recording the conversion using the book value method, Hardy should credit Common Stock at:
a) $15 million
b) $16 million
c) $18 million
Explanation / Answer
Solution:
Book Value of the bonds = Face Value $40 million – Unamortized Discount $8 Million = $32 million
Book Value of Half of the Bonds are converted into Common Stock = $32 / 2 = $16 Million
Hardy should credit Common Stock at b) $16 million
Hence the correct option is b) $16 million
Since company is following book value method, so the book value is taken as amount of conversion.
Market Value per share has no relevant here.